Estate Planning and Reverse Mortgage Heirs

A reverse mortgage can affect the estate that you leave to your heirs, and you should understand this and perhaps plan for it. Taking a reverse mortgage does reduce the equity in your home, so there is less to hand down to your heirs. However, this would be the case regardless of how you choose to come up with the extra money that you need to have a comfortable retirement.

Say, for example, that you need an extra $100,000 to pay off some debts and increase your monthly spending money, and that you own a home worth $400,000. You could sell it, buy a $300,000 home and spend the extra $100,000. Your heirs can then inherit a $300,000 home. Or, you could take out a reverse mortgage and pay your bills from the proceeds. If you use up $100,000 of home equity, your heirs inherit the remaining $300,000.

If you have investments, you could liquidate them to come up with the cash that you need. Again, this reduces money available to your heirs. So ultimately, the real decision for you is whether it’s more important to leave your loved ones as much as possible, even if you have to deprive yourself, or whether you’d rather enhance your security and comfort as you age, even if that means leaving less to your heirs.

The advantage of a reverse mortgage, in the above example, is that you get to continue living in your $400,000 home. You are spared the hassle and expense of selling, buying and moving.

How Much Equity Does a Reverse Mortgage Use Up?

That depends on what sort of reverse mortgage you choose, the interest rate and fees that you pay, and how long you have the loan. Here, for example, are three different scenarios involving a 65-year-old borrower and a $400,000 home. In all three instances, he borrows $100,000, using the HECM Saver loan with its lower closing costs. With Option A, he takes a $100,000 lump sum with a fixed loan at a 4.75% rate (plus 1.25% annual mortgage insurance). With Option B, he draws $6,667 per year on a line of credit. With Option C, he gets a monthly payment of $555. For the last two options, he has to take an adjustable rate mortgage. We’re going to assume that his adjustable rate goes up one percent per year, to its 12 percent cap, and stays there. Here’s what’s left for his heirs after fifteen years: